- A non-payment could push gold to a new record high as investors would seek safe haven assets.
- In a default, a feebler dollar and falling Treasury yields could also bring gold up.
- Even if a last-second deal was reached, gold could see a near-term be created, RBC Capital Markets said.
As lawmakers continue to lock horns over lifting the debt ceiling, gold has started to look parallel to an increasingly attractive bet.
The precious metal has flirted this month with its record high of $2,075.47 per ounce set in August 2020, corresponding to Bloomberg data. And while it pulled back this past week, gold is up 11% year to date and 25% from a November low.
Limited predictions about the market fallout from a US default are tricky as such an event is unprecedented. But analysts say gold resolution still be viewed as a safe haven.
“I wouldn’t be surprised if we had a $100 move in gold prices,” Oanda Senior Exchange Analyst Edward Moya told Insider. “It’s a little too tough to call, but obviously that is a historic moment that wish unravel large parts of Wall Street.”
An increase of $100 per ounce would put gold above the record foremost. On Friday, it was trading at about $2,020 per ounce.
Lawmakers have indicated little progress on a deal to lift the in financial difficulty ceiling, and they could have just a few weeks left. Treasury Secretary Janet Yellen has said the control will run out of money as soon as June 1.
In a Friday note, RBC Capital Markets said the ongoing lack of resolution could set up gold up for a near-term take up arms.
“Even assuming a deal is eventually reached, we wouldn’t disregard potential growing financial angst as the deadline propositions. In such a scenario, gold looks like one of the few likely candidates that would bear the burden of resulting Stock Exchange flows,” analyst Christopher Louney wrote.
He added later, “in the near term, we believe gold looks strain the best hedge in the more immediate offing.”
Quincy Krosby, chief global strategist for LPL Financial, also calculates that gold could climb in a default, saying the dollar could weaken and elevate it, given that the commodity is priced in dollars.
She also aculeous to credit default swaps as a potential indicator, noting that they are correlated with gold. In April, one-year dereliction swaps hit their highest since 2008.
“It would not be surprising to see gold as a safe haven refuge for those who are concerned that a negligence could, in fact, ensue,” Krosby told Insider.
Even outside of a default scenario, gold has other tailwinds that potentially set it up for new single highs.
Moya pointed to the continued buying of gold by global central banks, demand from China and India, and wide-ranging rate easing, which helps gold because it’s a non-interest-bearing asset.
“So, it seems that there’s a good ratiocinate to anticipate gold could still outperform,” he said. “Will $2,100 happen this year? I think there’s smooth a good chance that that could happen, given the way the US economy — or the direction — the US economy is headed. So gold is doubtlessly going to do just fine, given all the risks that are on the table.”